Trade adjustment dynamics and the welfare gains from trade

George Alessandria, Horag Choi, Kim J. Ruhl

Research output: Contribution to journalArticleResearchpeer-review

1 Citation (Scopus)

Abstract

We introduce time and risk into the fixed-variable cost tradeoff in heterogeneous firm trade models: Investing in exporting gradually and stochastically lowers the costs of exporting. In the model, aggregate trade dynamics arise from producer-level decisions to invest in lowering their future variable export costs, and tariff reforms generate time-varying trade elasticities. The gains from reducing tariffs arise from substituting away from firm creation and towards exporting. This substitution is larger when new exporters are smaller and take longer to grow into successful exporters. The welfare gains from reducing tariffs are much larger than the long-run changes in consumption and the welfare gains cannot be recovered from a static model or from formulas based on those models. Comparing steady-state outcomes can predict a welfare loss from reform when the actual change is positive.

Original languageEnglish
Article number103458
Number of pages26
JournalJournal of International Economics
Volume131
DOIs
Publication statusPublished - Jul 2021

Keywords

  • Firm dynamics
  • Trade elasticity
  • Welfare

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